When it comes to new initiatives that Distributed Ledger Technology (DLT) can support, Central Bank Digital Currency (CBDC) is one gaining considerable importance in our ever-changing economy. With a stark decline in cash usage due to the COVID-19 pandemic, it is crucial that we reconsider the instruments and methods by which we transact. Still, digital currencies issued by central banks raises a number of questions, ranging from deciding the scenarios in which such changes are desirable, to how they can effectively be implemented.

Our recent webinar–featuring 12 leading experts participating in the most advanced CBDC projects in the world–provides extensive insight into the future of CBDCs. This post highlights the key takeaways from our webinar, helping you to visualize what the future of currency could look like.

Who is Responsible for CBDC: the Public or Private Sector?

A crucial aspect of CBDC is that it brings together core responsibilities held by the public sector with innovative technologies born out of the private sector–both worlds being governed by different outlooks and priorities. Tobias Adrian–Financial Counselor and Director of the Monetary and Capital Markets Department at the International Monetary Fund (IMF)–outlines the frictions and opportunities of this collaboration as he considers how the responsibility for delivering CBDC can be distributed.

Taken together, Tobias and Raphael Auer – Principal Economist in the Innovation and Digital Economy Unit at the Bank for International Settlements (BIS)–illuminate four different models for CBDC operation. While Tobias focused his discussion on his proposal for a synthetic CBDC–where the private sector assumes the responsibility of CBDC issuance– Raphael focused on three architecture he has identified where the central banks itself issues the CBDC.

• Direct CBDC: Payments are operated by central banks.
• Intermediated CBDC: Central banks only operate wholesale accounts, retail payments are operated by the private sector, and central banks have no say in technical innovation.
• Hybrid CBDC: The private sector operates all payments by default and central banks only act as a backstop.
• Synthetic CBDC: There are narrow payment banks, which issue highly stable assets backed by reserves they hold at the central bank, which is similar to other stablecoin proposals. In this scenario, the private sector also still operates loans and payments.

Regardless of the model chosen, there will still need to be significant collaboration between central banks and the private sector. Hanna Armelius addressed this, referencing her personal experience as a core policy adviser to Sweden’s Riksbank, which is testing its own retail CBDC dubbed the ‘e-krona’. With his uniquely broad perspective as part of the IMF, Tobias outlines three core challenges that central banks will face in partnering with the public sector on CBDC:

Interoperability of currency:  This is significant as holders of different coins will require the ability to exchange with one another. Central bank enforcement of interoperability is also important for ensuring fair competition as private firms might attempt to consolidate their ecosystems by limiting the outward mobility of capital with ‘native-only’ tokens.

Bundling of coins with other platforms: Specific to synthetic CBDC, there is a risk that the bundling of coins with social media or other platforms may lead to unfair competition, as the value of the coin would reflect the success of the platforms. Thus, central banks must create regulation, supervision, and rules within CBDC licenses.

Payment system stability: Central banks must ensure that CBDC business models are resilient to macro-economic shocks.

How do we move forward with CBDC?

A key discussion during the webinar focused on how CBDC can be realistically brought into use. Sopnendu Mohanty – Chief Fintech Officer at the Monetary Authority of Singapore (MAS) – spoke of progression with urgency, declaring: “No more experiments, because the path to production is very clear.” He claims that the technology (for wholesale CBDC) is ready; the last element needed is the central banks’ decision to move forward.

Central banks still have several concerns that they wish to investigate before reaching finality. Nino Landerer – Deputy Head of Banking Operations Analysis at the Swiss National Bank (SNB) – shares his own reservations and details the experimentation that SNB is undergoing.

For example, it remains uncertain how central bank money may be introduced into a DLT platform without introducing risks. To address this question, SNB is trialling both issuing central bank money onto the DLT platform itself and integrating the DLT platform into the existing Real Time Gross Settlement (RTGS) system.

Additionally, it must be ensured that the new architecture is interoperable with the old central bank non-blockchain infrastructure, other blockchain platforms and other currencies. Nino clarifies that questions of interoperability require not only technical solutions, but standards, jurisdictions and legal aspects. He claims that it is important to set rules to ensure fair cooperation from the very beginning of the process. On the other hand, Sopnendu asserts that focusing on interoperability at this early stage will only delay progression; all that is needed at this point is taxonomy between parties and standards, and the rest will follow.

How can we ensure financial inclusion with CBDCs?

 Another critical subject discussed during the webinar is the ability of CBDC to mitigate conditions currently exacerbating wealth inequality. Our expert panel considered how CBDC will impact developing countries, as well as the challenges that must be overcome to ensure wide access of currency.

Can CBDC help to bridge inequalities?

Lotte Schou-Zibell – Regional Director for the Pacific Liaison and Coordination Office at the Asian Development Bank – clarifies that CBDC can be an enabler of financial inclusion, but may not solve larger, more systematic issues such as wealth inequality. In principal, CBDC motivates wider access to means of payment yet, there are several elements impeding this.

As Konstantin Peric – Deputy Director of Financial Services for the Poor at the Bill and Melinda Gates Foundation – highlights, not everyone is equipped with smartphones, which serve as prerequisites for tokenized currencies.

Lotte stresses that over 1.7 billion are without banks and 1 billion more do not have IDs – these issues need to be solved before CBDCs are even relevant for a large portion of the world. As so many people are offline, CBDCs must have an offline function too. Konstantin highlights that there must be interoperability between the largely account based currency of developing countries and the tokenized currency of CBDC.

Clearly, for CBDC to reach people with lesser infrastructure and make a positive impact, other issues of inequality must be solved. The role that CBDC can play across the world is highly dependent on the positions of individual countries and government policies. In this project, the public and private sectors must work hand in hand to make crucial progressions in the world’s economy.

Final takeaways

• The private and public sectors must work together and divide responsibilities to ensure successful implementation of CBDCs.
• To achieve this, the concerns of the public sector will need to be addressed and regulations + supervision must be enforced.
• Interoperability is a crucial feature to allow wide operation of CBDCs. This is key for payment interaction not only across borders but between different levels of wealth.
• Other challenges must be overcome in developing countries and groups to ensure wide access to CBDCs.

The ‘Building CBDC’ webinar highlighted many important challenges and opportunities surrounding the growing possibility of CBDC in productions. However, each conversation warrants its own in-depth discussion. While the future is within reach, it is just as clear how many more discussions of this sort need to continue to take place.

Interested in finding out more?

R3 is hosting a CBDC Working Group which kicks off on September 7 2020 – email cbdc@r3.com for more information.

Download the full recording of the webinar here.